A Discussion with Fernando Paredes, Interim Director, World Bank Guatemala

January 19, 2016

Background: Fernando Paredes now
works for the World Bank in Guatemala, after a long career focused mainly on
Latin America and especially Guatemala. He reflects on major challenges facing
Guatemala, including electricity generation, land reform, and government
leadership. He worked both for the Planning Secretariat and for the Social
Investment Fund and highlights insights from this experience, notably the
difficult efforts to achieve land reforms. He highlights the challenge of
uncoordinated and often creative Catholic Church efforts to fill
gaps that result from poor governance. This discussion between Carlos Martinez
Ruiz and Fernando Paredes on January 19, 2016 was part of Berkley Center/WFDD
research on religious dimensions of Guatemala’s development.

Could you tell us how you came to
your current position?

I
currently serve as the interim director of operations for the World Bank office
in Guatemala. I studied economics; my specialty is social evaluation of
projects and social project evaluation. I initially worked for the Social Investment Fund [Fondo de Inversión Social, FIS] on economic
planning and rural and social development. I had the opportunity then to visit
almost all Guatemala’s municipalities, looking at project development of all
kinds, ranging from education to healthcare. This was before the Peace Accords
were signed. I also had the opportunity to work on economic planning for the
energy and mining sector with the Secretariat for Economic Planning [Secretaría de Planificación Económica, SEGEPLAN]. My job was essentially to
prepare the inventory of projects that were to be submitted for consideration for
external cooperation when the Peace Accords were signed.

I then worked for a
time in the private sector. Given my interest in development projects to
advance my country, after the signing of the Peace Accords I got involved in
agrarian issues, particularly the funding of land reform. For seven years, I was
director of a project financed by the World Bank. My role was to manage a
social fund to develop productive infrastructure for groups of farmers who had
agreed to borrow to buy land under the institutional framework created after
the Peace Accords. When that project ended, I began working for the World Bank.
In fact, this occurred exactly a week ago.
In SEGEPLAN,
what was the focus of your work?

When
I worked for SEGEPLAN, we were still at war. We had experienced many problems
that had damaged much of the energy infrastructure, and due to security issues,
there was tension: investments in the energy sector slowly declined. There was
a consensus among the politicians and think tanks that was very much in line
with the consensus in Washington: that some kind of profound reform needed to
take place in Guatemala. Among the sectors best suited for privatization was
the energy sector. That is when the discussion began about which model to
follow. In the case of Guatemala, they ended up following the Chilean model.
You refer to damage to the energy
sector in Guatemala. What did that involve?

There’s
the matter of hydroelectric plant construction, the expansion of transmission networks,
and energy distribution. Remember that at that time, in 1991 and 1992, the
nation depended heavily on the Chixoy hydroelectric plant. Two years of drought
were already wreaking havoc; and it reached a point in 1992 and 1993 when there was
energy rationing because the dam was not producing enough. We were looking for alternatives
and fixed on bunker generation. It was a very costly process, but it was the
quickest thing that could be invested in.
What is bunker generation?

In
this case, they acquired what were called barcazas,
mobile plants that generated energy through the use of bunker. These were
incorporated very quickly into the system, but obviously because of the
emergency situation and the costs of gas, it was a very expensive way to
generate energy. That’s when they started to consider how the system could work
better: on one hand thinking about privatization and the development of a legal
framework that would bring in new actors, and on the other state investment in
some specific projects like rural electrification. This was in 1993, but it’s
only been within the last five years that we’ve seen the impact on the energy
market. There is now more diversity among the actors. The energy matrix has
changed, and next year there will probably be only one operator that will
generate more than Chixoy generated. The expansion of the transmission networks
is nearly complete, which will make energy distribution much more reliable.

The
concern about cost is always debatable; there is a recent argument about how
much to subsidize small users. The truth is that there has been a lot of
progress. When it comes to deficits, when it comes to generation and
consumption, these are no longer fundamental concerns. The issue now is how
Guatemala can truly become an energy exporter for Central America, which comes
with legal challenges. A certain percent of the rural population constantly
demands nationalization of electricity. I think this has already reached a
point of no return with so much investment. There are many variables, including
reducing poverty by access to basic services, but also being able to generate
investment with more reliable electricity.

What
is clear now that wasn’t clear before is that the issue of generating foreign
investment and rural economic growth to help create jobs is not a one-variable
equation. In other words, energy was only one component; other influential
factors have to be addressed one-by-one. Failure to do so means that the necessary
conditions to attract foreign investment that would create jobs have not been
met. Poverty has been reduced to some extent by tending to basic needs, but as
time goes on, it is clear that only increasing incomes and improving education
and healthcare can reduce poverty. But job creation moves very slowly. Data on
rural poverty rates and urbanization collected for the national plan (Plan
K'atún) show a larger urban population than rural population. This indicates
that wealth creation in urban areas requires another kind of intervention that
is not necessarily being addressed quickly.

And
investment in rural areas is extremely expensive. Bringing quality education to
a town with 20 children is very costly and requires innovative alternatives
that are not necessarily as efficient as when there are 300 or 400 children in
an urban area. The same applies for healthcare and energy access; the places
that don’t have electricity coverage are marginal areas where investment is
much more expensive, because you are putting up power lines that benefit 20 or
30 families. With income creation, you encounter the same issues: helping 20
farmers produce something and integrate themselves into the market is very costly.
Future governments will need to think about what type of urban investments are
feasible. This doesn’t mean that they should forget about agriculture, since
this is where the highest poverty rates are, but they need to anticipate a
situation where there will be migration to urban centers.
So the principal sources of energy
are hydroelectricity and bunkers?

There
is one hydroelectric plant, and a solar plant is being expanded. Other sources are
being used that are not fully in operation yet, such as coal, but the use of
bunkers has been declining. They also
intend to build small hydroelectric power stations. Renewable energy now
carries more weight than nonrenewable energy and fossil fuels.
Tell me more about your time with
FIS!

After
SEGEPLAN, I moved on to FIS. It was a radical change, because I went from
sitting behind a desk thinking about big investment plans to an organization
that worked on small, one-on-one projects. We worked with hamlets and villages.
One gets to know the other Guatemala, which is terribly affected by poverty and
by people’s desire to better themselves. We are talking about a period after
30, 40 years of war when there was a very weak state. There is a totally
forgotten population that has to be recognized.
What regions were you working in?

We
were working across the nation. There were 333 municipalities at that time, and
I kept a register of each time I visited a municipality. When I left the
position, there were less than 10 municipalities that I had not visited. Despite
the ceasefire agreements, we were still at war. We were intervening with water,
education, healthcare, community pharmacies, irrigation, and supply stores; but
they were all relatively small interventions, with the biggest project being 1
million quetzals. There were a variety of projects that ranged from the
construction of a classroom to silos for people to store for daily needs. Some
of the projects were successful, but others got into the system when another
structure should have taken them on. The concept of helping people adjust was
not very present during that period, and it was assumed that many things would
happen through inertia.

The fund was to be a temporary intervention, though it was
drawn out for a long time before it finally closed. However, it did have an
impact. For example, the deficit in classrooms was taken care of in an
incredible way, but then they needed teachers, they needed tools, they needed
quality teaching. An education self-management program was added in the early
2000s, but unfortunately, it was later taken over because the employees,
instead of being contracted by the parents, became part of the Ministry of
Education, which brought in the unions.
And to this day, the country has a
very high illiteracy rate, is that right?

The
problem is no longer illiteracy per se, because there are municipalities that
have been declared illiteracy-free. The issue now is functional illiteracy,
where you learn to read but you never apply the skills. When you look at
education coverage and evaluations of quality of education, it is very clear
that there are terrible deficiencies at the private schools, inner city
schools, and rural public schools. The quality of education is horrible, with
many contributing factors.
In terms of the environment, what
challenges did you see working for FIS?

At
that time, the idea was to get the environment on the agenda, on people’s
minds. It wasn’t something that was necessarily present; people had other
concerns and priorities. There was an environmental agenda, although not particularly
well-developed, from the late 1990s, funded by NGOs. The legal framework began
to appear in the late 1990s. There was an institutional framework, but it was very
weak, with few resources; those involved were essentially processing agents.
For example, I need an environmental impact license to be able to develop some
kind of investment, like a subdivision. This takes scarce resources, leaving
very little for planning.

This is where the legal framework comes into play: requirements
and deadlines consume both resources and interest. In terms of deforestation,
water contamination, and solid waste management, very little has been done, and
we are in a situation where, instead of getting better, we are getting worse.
If
you go to a municipality in a remote areas and start a dialogue with the
community, and you tell them that solid waste treatment involves a cost because
you are going to recycle or move the disposal site, it will be a source of
conflict. Not everyone is going to be willing to pay even one quetzal more for
waste removal services. Then the trash collectors multiply.

These are issues
the municipalities don’t want to get involved in for fear of large-scale
political blowback. For example, when the Coatepeque government tried to
regulate and strengthen a service that had previously been free, there were
large, violent protests. In the end, the local governments have to pull back
and make the decision to either absorb those costs with their resources or not
address the issue. As long as we don’t have the resources to address primary
needs, we are never going to be able to address issues that, however important,
are not worth it politically.
Historically in Guatemala, was
there a communal land system? How were land rights allocated? Has there been
any kind of agrarian reform besides the Arbenz attempt?

The situation is problematic and changing. There was the
original sin of expropriation, a reform based on the expropriation of idle land.
That was already a mortal sin. Today even mentioning something along these
lines will lose credibility with the population.

This is a very conservative country, and agricultural
issues are very complex. It goes back to the conquest regime for one basic
reason: the lack of precious minerals in Guatemala that could be easily
extracted. The only way to generate wealth was through agricultural production.
But
agricultural production, to be profitable, required mechanisms that amounted
almost to slavery and that had the effect of creating patterns of land
distribution that were violent, because it was a conquest, removing land
ownership. No one held land except according to where they lived or their
ethnicity at the time the conquerors arrived. A model of land ownership
developed that changed over time.

Moving
to the coffee reform in 1870, a major expropriation process benefited the Church.
Then there is the issue of the two world wars when one president encouraged a
German immigration policy. Some accounts claim that this was literally to improve the
race—there are written accounts, and people still say it. But it was World War I that led to taking property to give to the Germans, which was returned
after World War II, then removed, then returned. In the middle came the
Arbenz reform, and after Arbenz came a process called agrarian transformation—that is, the granting of land that had no owners. But the process was long,
inefficient, and corrupt.
Which takes us to the time of the signing of the Peace
Accords, when there was a recognition that many people had possession, but not
ownership, of land.

The idea was to regularize land tenure, with procedures
based on possession that gave people legal certainty, on the assumption that
this legal certainty is necessary for long-term investment or to contract a
mortgage. In practice these assumptions were wrong, and the impact was that for
four to five years there was no investment in farms. That led to the coffee crisis, because the coffee growers who were already uninterested in managing their
properties ceded them to the Land Fund, and thus to peasants who could buy
them. It was not the world’s best coffee. We could talk for hours about why
that model failed, but I would argue that it failed because all were guilty,
from the peasant, the indigenous and peasant organizations that agreed to the
model. Basically they had different objectives, and they knew that sooner or
later, no government would ever force them to repay their loans. And that is
just what happened, with nearly 80 percent debt forgiveness. More than the half
the original beneficiaries are not on the farms. Thus the model failed
completely.

The model has worked in other countries, giving access to
the land to the poorest on concessional terms. But this model of access to the
market, or assisted access to markets, generally worked for peasants who were
not the poorest, who already were able to hire people, who had certain new
business skills, and had the vision to produce not for subsistence, but to
enter the market. They require specific technical assistance and some working
capital, but they are willing to pay. The problems came when the model was applied
to everyone. Looking for simple answers gives a poor and expensive model. The
poorest were unable to pay, and the development process we are talking about was delayed
for 10 to 15 years. The model failed, and the agrarian problem is still with us,
even if somewhat toned down.

There are lessons here. One is the land was not the way
to create wealth. It is indeed important, part of the equation, but it was not
"the" single instrument. We must also understand that the Guatemalan
vision is very conservative. Let’s leave aside farms that were seized through
violent means; that occurred, in significant numbers, but cannot be generalized.
We are looking at mechanisms to give people access to land, probably through
renting or leasing land. What is most important is to have land, with access that allows
a peasant to continue subsistence production, and there is impact. We recognize
that there is still poverty, and that probably requires other measures. Where natural
and social conditions allow certain properties to make profits, that needs a
firm, steady, and sustained state policy beyond what the government now has. We
have yet to find political, rather than the macroeconomic, solutions that are sustainable
over time. So you have to go back to the drawing board on that topic.
What are the current land
concentration levels?

Guatemala
has a range of land problems, including the dynamism in the land market, and
the fact that these groups have access to credit through organizations; they form
an association that owns the land. If you go to the property registry and look for
property per capita, the situation is blurred because the property doesn’t
belong to individuals, but to an organization. Thus, the basic procedure is to
divide the land by number of inhabitants, but you also have to subtract urban
migration. The GINI coefficient continues to show great inequality,
particularly because there’s expansion of big areas like sugar cane and African
palm. That’s not to say that sugar cane and African palm are bad; what I’m saying
is that when the farming of these crops spreads, by definition it affects the
concentration of inhabitants so that people have less land. If a big landowner
has acquired vast stretches of land that may address the issue of poverty via
job creation. Land property concentration must be the most extreme in Latin America.
What are the current vulnerabilities
or challenges from your perspective?

The
greatest vulnerability is income. People should have a decent income. Society
needs to understand a few things. First, the means, and I mean lawful means, do
not matter in the sense that it can be through a job, through production,
through offering a service, but the point is to create income. I am not talking
about unfulfilled basic needs—there is still a lot to be done there. For example
the dry corridor is a structural problem, but people still live there.
What is a dry corridor?

A strip in which there is a perennial drought and famine and thus hunger and
malnutrition and other problems like poor health. Wherever that happens, all
want to play the role of the good Guatemalan, so we donate a pound of beans, a
pound of corn. This is a recurring theme every year. We need to understand and
focus on what will really help the people in those areas, or find a way for them
to generate income. This involves self-subsistence and then monetization. But
let's say that is an exception. The point is: how to you generate income for
people?

Sometimes you can get an inside perspective which, of course, is not
systematic or empirical, but there is a youth that is ready, in contrast to
years ago, to migrate. This did not occur years ago when people stayed on their
plot of land—hence the phenomena of land fragmentation. Young people now are
willing to migrate and to get a job.

The issue is how to generate income. That
is important, but at the urban level, the opinion-formers of middle and
upper-middle class must understand that Guatemala is not only the city, and that
poverty is not what anyone desires. That alters the perception of what the state can or cannot do, and how I contribute to how the state does it. The
challenge is to understand that four lane highways that transport products to a
port and make them more competitive do not benefit exclusively the private sector. There are mechanisms that ensure that producers that have a market
share pay more because they have better access. We need to work on that. But
people must also understand that building a road to a group of farmers is
important; they may need to walk 20 hours to get to an urban center to sell
their product, and with a road, even if it is not paved, the time is cut to six
hours, and resources are not wasted.

The state needs a vision. Guatemala faces a complex situation, not so different
from other countries, but, like any country, it is complex. If we do not
appreciate our situation we will never find a solid solution, even if by luck we
were to satisfy everyone. We must appreciate the principle of subsidiarity: the
state must work for the overall welfare of the country, but not tend to each
individual need, nor each political act, but with impact.

The greatest
challenge is to understand that we need everyone to get out of poverty, that
poverty damages us all, and to work for an efficient state, an efficient government.
That means that with an 11 percent tax burden we will never get anywhere. At
the same time we need to be vigilant that resources are used well. Happily we
have now taken a first step towards a situation where there is no corruption, or
at least it is not so extreme. Let's say that we have taken that step, with a
long way to go to reach the point where not only is there no more corruption,
but resources used have impact. Because building a stadium rather than a water
project may not necessarily be corruption but a problem of priorities, even
assuming that the stadium is built at an affordable cost. That is the greatest
challenge and a core condition for dialogue.

Two
things have special importance there: to avoid asymmetries of information in
dialogue, thus both parties to the dialogue need to be informed, and further to
ensure that no one side can impose its will on the other. If I feel I am in a
genuine dialogue I will be willing to give something up. A dialogue in shades
of grey can steer away from stark black and white positions, or yes and no.
There will be winners and there will be losers, but even in the worst case,
everyone wins something. Building such a dialogue and such a vision for the
state is the first step, and without that you can do nothing.
Is climate change on the radar for
the state? What is the general consensus among the people?

Everyone
talks about it, but there are no resources, and it’s not a priority. It is
discussed, and of course, there will always be that one group that doesn’t
believe in the effects of climate change. We are definitely living it, however.
When I was a kid, November was for sweaters and scarfs, but look at the
temperatures now. Summer generally used to end around October 20, but now we have rain into November. The high and low temperatures have
changed for both cold and hot weather. There are many arguments about causes,
and the recent catastrophe in Cambray has revived them.
What would be a healthy percentage
for tax collection?

Assuming
that resources are invested effectively, with the amount of poverty in the
country and the investment requirements that exist, it’s difficult to pinpoint
a formula, but I would say that with anything under 15 to 18 percent, we will never
escape our current situation. And that’s just to start. When a sense of trust
is reached that what is paid will be put to good use, it will be easier to
increase that percentage. On the other hand, if there is economic growth, that
will result in a larger base of contributors. But for an irreversible momentum for
change, anything under 15 percent will not support necessary state
interventions. The challenge is that with this rate, only an honest government
can start to make changes. Again, this is assuming that 100 percent of the
resources from the budget are invested honestly and efficiently.
How is the World Bank forecasting
relatively stable or high growth for the region?

Guatemala
is like someone who controls his blood pressure: you measure growth at any
moment, and it’s around 3.5 percent. There has been macroeconomic stability for
the last 10 to 15 years, but nothing else happens. We are not heading for a
terrible catastrophe, in other words. No one foresees a break in the equilibrium.
But we haven’t taken the next step to propel growth either. Our heart rate will
not go up unless we exercise, and to exercise we need to invest, leave our
comfort zone, and probably go into debt. In general, debt per se is not bad. For
example, if I go into debt because I anticipate the benefits of something that
I would never be able to do unless I save for 20 years, why wouldn’t I do it? I’m
still going to pay it off in 20 years, but I can start to reap the benefits in
two years.
Is the current debt ratio healthy
for the country?

In
relation to Guatemala’s GDP, it’s a manageable 23 to 24 percent. The problem is the
percentage of the national budget that is dedicated to debt service. That’s why
the tax burden is insufficient. The other issue is how the debt was negotiated.
Sometimes expensive debt is negotiated, or short-term debt, and you’re left
without any other options because deficits occur in a time-sensitive manner
that doesn’t allow for an 18-month negotiation process.

For example, I might
need money for one month because I don’t have enough for employee salaries. It’s
like using a credit card with a high APR. So the debt ratio compared with the
debt service is something that needs to be on the radar of future authorities
so that they can adapt a debt-restructuring strategy. I don’t mean renegotiate,
but they need to replace bad debt with good debt, and be very careful with any
new debt so that it does not excessively burden the budget.
What is your perspective on the
relationship between groups that are working in development, both the large
international organizations and the small NGOs?

My
view is that the absence of a strong government explains Guatemala’s problem.
If a government or a governmental mechanism is incapable of coordinating its
actions with those of civil society, what results is fragmentation and
duplicity. To explain, it is useless for all of the foreign organizations and
donors to sit at a table and talk about what they are doing if there is no
governmental intervention to put order into the areas of action. So what you
find is that in a community, there are churches from different denominations
working on a health issue or an education issue. In some cases, you do see
extremism, where their work is only for the followers of their religion. In
other cases, you see a much more open and democratic process, but at the end of
the day, there are fixed costs that become extremely expensive because everyone
needs a platform to give the service, plus the variable costs. If these were
distributed regionally in a well-organized way, or complementary to
governmental intervention, the impact would be much better.

When there are
holes, these holes are filled; filling them without coordination from higher up
probably allows for scams with high costs that can’t be quantified because there
is no one there to add it all up. We all know that duplication occurs. What the
churches do is good and natural, but it could have a better impact if there were
government coordination.
So the large international
organizations don’t coordinate with the K'atún?

The
K'atún is very new. They are just now making it official, but the challenge is to
make a plan a budget, and honestly, we are far from that point. When Guatemala adapts
that plan, it needs to be clear that this is our path, and whoever is in charge
of the government will have to implement it. But they have already made the
decision to implement it. So there will have to be decisions on what to do
first, second, etc. But until the government adopts it, the K'atún is just a
list of things that could be done, that are still in the final stages of
planning. We need to look at viability, define the order, define our
priorities, allocate funding sources, and look for popular support. If the
planning is not associated with resource allocation, it simply becomes a
nonsensical academic exercise. That is the challenge that we need to overcome.